Issue #4, Spring 2007

Right from the Start?

What Milton Friedman can teach progressives.

It is here that Friedman and Schwartz felt the Fed had made its key mistake during the Great Depression. The stock market crash of late 1929, the recession that had already begun that June, the existing agricultural depression, and other news that shook confidence in the banking system led depositors to withdraw money from their bank accounts. The calling-in on loans that followed led to a steep fall in the money supply, in the liquidity of the economy. And the Federal Reserve stood by. It did not–as Friedman thought it should have–take every active step it could to keep the economy liquid. It did not furiously print currency. It did not frantically buy Treasury bonds for cash from all comers. Instead, it followed what it thought was a “neutral” monetary policy. And it was this neutrality that, in Friedman’s view–and in Bernanke’s, as well as my own–made the Great Depression so great. This is not exactly the same view as Keynes, but the differences are smaller than most people realize.

To be sure, Friedman always said that he favored a minimalist government, a “night watchman” state only–but a government nonetheless. Establish property rights. Enforce contracts. Prevent violence and theft. Defend the country. Keep the economy liquid by keeping the monetary aggregate M2 on a stable growth path. That, to him, was a minimalist government. But the last of these sticks out like a sore thumb: What is so special about the banking industry that the government must respond to a fall in demand for its services (for that is what going to the bank to pull out your deposit in gold constitutes) by providing it with a huge, immediate subsidy (for that is what buying up banks’ Treasury bonds for cash at their normal valuation constitutes)? And, if Friedman’s detailed study of the banking sector led him to make an exception from laissez-faire for this industry, who is he to say that a similarly detailed study of other industries would lead to similar conclusions about useful deviations from laissez-faire? And we have not mentioned that the “night watchman” state is itself a very powerful enterprise, able to make and enforce its own judgments about who owns what against not just against roving bandits, but local notables and even its own functionaries. Friedman’s minimal state is not so minimal, after all.

Friedman felt that his ideal state was the right one, but someone who reaches a different formulation can still agree with him on many of the same first principles. Indeed, it is by following through on these tensions in Friedman’s thought that I, at least, am able to feel the power of his arguments and yet retain my own uneasy combination of neoliberalism and social democracy.

This is not to say that Friedman’s legacy is all positive. Indeed, One of his closest ideological fellow travelers, Judge Richard Posner of the Seventh Circuit, worried about Friedman’s “dogmatic streak,” which took his “belief in the superior efficiency of free markets to government as a means of resource allocation” as “an article of faith, and not ” a hypothesis.” Posner claims that Friedman found the ability of Scandinavian nations, particularly Sweden, to achieve and maintain very high levels of economic output despite very high rates of taxation almost to be a personal affront. And, in the long run, this faith crippled the intellectual movement of which he was the head. Sometimes government failures are greater than the market failures for which they purport to compensate. Sometimes they are not. We badly need a sophisticated, flexible, and reality-based intellectual toolkit to analyze different cases. We do not have one, in part because Friedman’s anti-government faith blocked his spear-carriers from helping to develop it.

But, perhaps more seriously, Friedman ducked the big questions regarding the relationship between economic freedom and political liberty, and he was completely incapable of seeing that political liberty is both a negative and a positive liberty: freedom from tyranny and oppression but also the freedom and power to decide on and accomplish our common purposes. These are the master questions of history and moral philosophy, and for all his brilliance and hard work, Friedman is of absolutely no help in answering them. As Posner says, Friedrich Hayek’s Road to Serfdom “flunks the test of accuracy of prediction ” [The] view that socialism of the sort that Britain embraced under the old Labour Party was incompatible with democracy [is] extreme and inaccurate.” Yet Friedman bought into that Hayekian view. And in so doing, he ultimately led his followers, and tried to lead the rest of us, down a false path.


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Issue #4, Spring 2007
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Dr. DeLong politely omits mention of the way Friedman's ideological commitments led him to cozy up to the murderous Pinochet regime.

Mar 17, 2013, 12:04 PM
John Emerson:

"[what] would have cured the Great Depression [was] a substantial expansion of the money supply…"

This is the pure Greenbacker doctrine, which was followed by one branch of the 1896 Populists.

Mar 17, 2013, 4:54 PM

Excuse me but Friedman makes a clear distinction of 19th century Liberals and 20th century liberals. the main difference is while the 19th century liberal strives for freedom without the intervention of the state, the 20th century liberal uses state intervention to achieve freedom. Yet you refuse to make that distinction, intellectually very suspect behavior. As for the Pinochet regime and Friedman, I can give you a extensive list of "Liberals" and their ties with great "democrats" around the world. Even the pope had to cope with realpolitikal situations.

Mar 18, 2013, 2:38 AM

Great article! But I think DeLong is wrong in the last paragraph. I believe Friedman would have disputed the phrase "our common purposes," arguing that the market far better expresses our individual purposes in aggregate than does a system of majority rule where one faction seeks to achieve its purposes at the expense of the other faction. As for his views on the relationship between political freedom and economic freedom, Friedman did predict that economic freedom would lead to political freedom in the case of Chile, but in later years he he balanced this view by saying that political freedom tends to erode economic freedom, so he wasn't sure which way things would ultimately play out.

I think Friedman recognized that the kind of rules you get by more or less unanimous consent - rules like those in the constitution - have the highest level of legitimacy and are the most likely to lead to pareto improvements. We're all better off living under the tyranny of such rules. But when political freedom means rule by majority, we are bound to produce a series of factional extractions that are on average negative sum. I think Friedman understood that perfectly well and so he was highly skeptical of unfettered political freedom.

Mar 18, 2013, 2:08 PM
Forensic economist:

Friedman was also against laws against racial discrimination since free markets would supposedly eliminate racism.

"Is there any difference in principle between the taste that leads a householder to prefer an attractive servant to an ugly one and the taste that leads another to prefer a Negro to a white or a white to a Negro...?" Capitalism and Freedom p.110

Mar 18, 2013, 3:08 PM

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